Osbornes hope sale of shale leases eases woes

3 of duo's oil and gas companies are bankrupt

The shale gas business taketh away, and the shale gas business giveth back.
That, at least, is the hope of Richard and Gregory Osborne, the father-son duo from Mentor with companies in various industries, including a handful in the business of conventional oil and gas drilling. The two are counting on the sale of oil and gas leases in Pennsylvania to help solve the bankruptcy woes for three of their oil and gas companies.
“It's exciting stuff,” said Gregory Osborne, who has been working on the sale of the leases.
The Osbornes have received court permission to auction on Aug. 16 oil and gas leases for drilling rights on 8,000 acres their companies control in Pennsylvania. The sale is to raise money to pay off roughly $30 million in debt owed to RBS Citizens NA and its local banking subsidiary, Charter One, according to bankruptcy filings.
Three of the Osbornes' companies — Oz Gas Ltd., Great Plains Exploration LLC and John D. Oil and Gas Co. — filed for Chapter 11 bankruptcy protection from creditors last January in U.S. Bankruptcy Court in Erie, Pa. According to bankruptcy documents, Oz Gas and Great Plains Exploration owe RBS about $20.4 million, while John D. owes the bank $9.1 million, all of it in the form of secured loans. Gregory Osborne said the current figure for debt outstanding on loans to the bank is closer to $26 million rather than $29.5 million.
The Osborne companies involved in the bankruptcy case have assets that consist largely of the oil and gas reserves they control. When the price of natural gas fell from about $12 per thousand cubic feet of gas (mcf) in 2009 to less than $4 per mcf throughout much of 2011, the value of those assets plummeted. Since those assets were securing the loans to Charter One, covenants of those loans were broken when the collateral behind them dropped in value, court documents state.
The price drops “had a snowball effect on the companies and their ability to manage their respective debts,” said Donald Whiteman, controller for Oz Gas and Great Plains Exploration, in a court filing.
But the lease rights that are being sold are worth far more today than they were a few years ago, because new drilling methods make it possible to access gas through the process of hydraulic fracturing, or fracking. Unlike the shallower vertical wells that the Osbornes' companies already have developed, fracking wells go more than a mile deep, then horizontally out a mile in several directions.
Gregory Osborne said the companies didn't think the Pennsylvania leases were worth anything, until recently.
“Here's an asset that, a couple of years ago, we had zero value for on the books — these were none of our core assets,” Mr. Osborne said.

Numbers game

The Osborne companies already have one bidder, Halcon Energy Properties of Houston, willing to pay $20 million for the rights to drill for gas and oil that the companies could not have accessed on their own — or at least not without investing millions of dollars into new drilling technologies.
That price equates to about $2,500 an acre, which Gregory Osborne noted was “the minimum” the leases now would fetch. Others will have the opportunity to outbid Halcon for the assets when they are auctioned off next month.
It remains to be seen whether the price will go up, but Mr. Osborne hopes it will, and his creditors no doubt share his hope. Jeffrey Baddeley, an attorney for RBS working on the case, declined to comment on the matter.
A successful sale of the Pennsylvania gas leases could help make the legal actions entangling the Osbornes' three companies moot.
Another of the Osbornes' companies, Cleveland-based Gas Natural Inc., which distributes natural gas to end users such as homes and businesses, on July 2 completed a secondary offering for $7.1 million of stock. All the 700,000 shares sold were held personally by Richard Osborne, rather than by the company itself.
Gregory Osborne said his father is using that money to help pay down the balance of the RBS debt. He said his father also likely will sell another 100,000 shares in Gas Natural, which would give him a total of $8 million that could go toward the RBS debt.
Bankruptcy Court filings had yet to reflect any payment on the debt, but reducing the amount owed by $8 million would leave about $21.5 million left to be paid, according to RBS' claims.
It would leave a gap of $18 million, by the Osbornes' calculations, as Gregory Osborne said his family and RBS disagree over interest and fees added to the debt.